Reserve Bank of Australia: Board minutes reveal three economic triggers that could bring interest rate relief

Minutes from the most recent interest rate meeting of the Reserve Bank have revealed that consumer spending, labour productivity and the global economy were the top future concerns when deliberating to keep rates on hold in November.

The RBA disappointed punters when it left rates on hold at 4.35 per cent shortly before the Melbourne Cup was run, making it a full year since rate relief.

The minutes reveal that inflation remained the number one concern for the RBA and when looking past the impact of the government’s energy rebates would take quite sometime to ease.

“Underlying inflation – as indicated by the ‘trimmed mean’ measure – remained too high and... forecasts did not see inflation returning sustainably to target until 2026,” the minutes said.

Three scenarios clouding the horizon

According to the central bank, while there were signs of recovery, household consumption growth remained weaker than expected, with “subdued consumer sentiment” and concerns about “real household income growth”.

The bank found the Stage 3 tax cuts and energy rebates had not led to a significant increase in consumption growth.

“If consumption proves to be persistently and materially weaker than the staff forecast ... a reduction in the cash rate target could be warranted,” the RBA wrote.

But it warned underlying inflation — as indicated by the trimmed mean measure — remained too high and forecasts did not expected it to return sustainably to target until 2026.

The RBA minutes come as more recent data suggests confidence in the economy is rising, with the latest Westpac-Melbourne Institute consumer survey revealing a 5.3 per cent rise in sentiment during November. Meanwhile, NAB’s October business survey showed improved business confidence, with conditions aligning with long-term averages.

The global outlook was also a concern, with some hope of a boost from Chinese stimulus but concerns about the economic impact of the US elections.

The RBA noted risks stemming from “a marked change in US economic policy following the US presidential election”, and uncertainties around “how other countries respond”.

Speaking at a business conference last week, RBA governor Michele Bullock elaborated on a scenario of Mr Trump acting on his campaign promise of high tariffs on China.

“What ultimately happens for Australia is going to be dependent on the responses of other countries,” Ms Bullock said.

“In the very extreme circumstances of 60 per cent tariffs on Chinese we don’t know how the Chinese will respond to that. Ultimately, if it’s not good for the Chinese economy, it isn’t good for us either.”

At the last interest rate call, the RBA decided that underlying inflation was still too high at 3.5 per cent and that conditions in the labour market were sufficiently tight to not warrant a rate cut.

The bank also called out the issue of low productivity and said “persistent weakness in productivity growth... could also boost inflation over the forecast period if wages growth did not adjust.”

How the labour market performed going forward was a key concern: “If forward-looking indicators began to suggest a widespread easing in prospective labour market conditions and a more rapid easing in inflation, the board might need to consider a policy response.”

In October, labour force data showed an unexpected drop in job numbers for the first time in seven months. However, the broader labour market remains strong, with measures of spare capacity staying steady or tightening further, reflecting recent stability in forward indicators.

Economists has been pushing out their forecasts for an interest rate cut from February to May on the expectation that Mr Trump’s policies on tariffs and tax cuts would result in US inflation spilling over to Australia.

In earnings reports released earlier this month, big four bank chief executives also pushed out their hopes for a rate cut.

“[Trump’s policies] would tend to be more inflationary than not,” said ANZ chief Shayne Elliott. “It would tend to suggest less and later rate cuts over here.”

While higher rates have been squeezing homeowners, the banks have reported that they are not seeing growth in loan delinquencies, and executives were buoyed by the fact that hardship applications had stayed flat after peaking earlier in the year.